Posted on 12/02/2009 10:45:34 AM PST by FromLori
When an insolvent American International Group distributed $165m in executive bonuses last winter, the public was outraged. But this was small change compared with what we have learnt recently from a federal auditor’s report on the US insurance group, almost 80 per cent owned by the US government. At the direction of the Federal Reserve Bank of New York, AIG quietly gave $62bn to pay in full the claims of Goldman Sachs, Barclays and other large investors.
Why did US taxpayers pay so much to the sophisticated clients of AIG when we could have spent much less to settle these claims? The federal auditor has finally explained to us exactly what happened in this episode, but we still do not know why. At best, we have three inconclusive explanations.
The financial products subsidiary of AIG sold these investors a large volume of credit default swaps, which obliged AIG to pay the full face value of designated bonds if they were to default. When these bonds deteriorated during the summer of 2008, AIG executives tried to persuade these investors to settle their CDS contracts at a 40 per cent discount to the face value of these bonds. On September 16 2008, the federal government recapitalised AIG and in November took over these negotiations. After less than a week, the FRBNY instructed AIG to capitulate by paying the full face value of the bonds – $62bn, compared with their $30bn market value.
Why? While Fed officials recognised that these settlement payments were “offensive”, they were defended as necessary to prevent the collapse of the financial system. But we have no way to evaluate the factual basis of this defence. Similarly, Fed officials initially refused to name the recipients of AIG’s payments on the grounds that disclosure would undermine the stability of AIG
(Excerpt) Read more at ft.com ...
ping
Note
“A third explanation is that the US government wanted to prevent foreign banks from becoming insolvent as a result of the American credit crisis – what has been called the exportation of the American disease. These foreign banks received roughly $40bn of the $62bn in settlement payouts from the AIG. Perhaps this was an indirect method to achieve the Treasury’s goal since Congress would not have authorised a direct bailout of foreign banks.
In my view, the FRBNY should have threatened to put AIG’s financial products subsidiary into bankruptcy unless the large US and foreign investors accepted a settlement of their CDS contracts at a reasonable discount. In bankruptcy, the AIG subsidiary would have been allowed to repudiate all its CDS contracts subject to a court-approved reorganisation plan. Most investors would have accepted a reasonable discount to settle CDS contracts immediately with an insolvent counterparty, rather than take the risk of much lower payouts after a lengthy legal proceeding. As the federal auditor’s report stated: “By providing AIG with the capital to make these payments, Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would not have otherwise received had AIG gone into bankruptcy.”
Why didn't that happen?
What’s to know? GS got paid because of their influence over the Federales.
Fascism/Corportism payoff’s to the right people by government sachs is my best guess.
Oh for goodness sakes!
Only 5 replies to this thread. this is only goes to show how morally bankrupt Freerepublic has sadly become.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.